There is a lot of uncertainty in the used car market right now, and some car retailers are better suited to the challenge than others, according to Needham.
Low production of new cars amid a shortage of semiconductor chips, coupled with soaring prices for used cars amid inflation, has left consumers with fewer and more expensive options. car retailers
have been tripping.
Auto retailers that prioritize technology are better suited than others, said Chris Pierce, an analyst at Needham. Barron’s. started coverage of
shares on Monday with a hold rating and an undisclosed price target. He said CarMax (ticker: KMX) is in a tough spot.
“KMX is the gold standard in the fragmented used vehicle retail industry, but we believe its number one position has come under an unprecedented level of pressure that continues to mount,” he wrote in a research note.
he points to
(CVNA), which is catching up. He sold half as many used cars as CarMax last year versus just 20% of CarMax’s sales in fiscal 2019. He also said Carvana is significantly developing its reconditioning capacity.
CarMax did not immediately respond to a request for comment. The analyst rates Carvana stock as Buy with a price target of $121. The stock would more than double from its current level to reach that target price.
CarMax shares rose 5% on Monday to $89.51, but are down 31% year to date. Shares of Carvana are up nearly 3% at $59.64, but have also slumped year-to-date, falling nearly 75% year-to-date. The
fell 0.1% on Monday, while the
Dow Jones Industrial Average
Pierce said CarMax shares are fairly valued but are incurring higher costs as it adopts a multi-channel strategy in response to competition from online competitors such as Carvana that are forcing the used vehicle industry to go from being completely offline to being more online.
“It is a non-digital space [that’s] behind the times when it comes to technology because these are major purchases,” Pierce said. “People could do research online, they could go to
(CARG) or wherever to get information about the car they want to buy, and then they will go to the dealership, but Carvana is proof that people are willing to buy used cars online and bring those cars to the driveway ”.
Broadly speaking, he expects auto retailers to struggle in the coming months as the Federal Reserve raises interest rates to combat inflation. That’s good news for fighting high prices, but bad news for consumers looking to finance cars long-term.
“On the one hand we have this potential tailwind of falling prices, but on the other hand there is this headwind that interest rates are going to be higher,” Pierce said.
Email Logan Moore at firstname.lastname@example.org.